Judge Gale's decision earlier this month in Corwin v. British American Tobacco PLC, 2015 NCBC 74 dismissed all of the claims of the Plaintiff class. If the name Corwin is ringing a bell with you, his case is the shareholder class action over the now completed transaction among Reynolds American, Inc. (RAI), Lorillard, Inc., British American Tobacco (BAT), and Imperial Tobacco Group. RAI (which you probably still think of as RJ Reynolds Tobacco Company) is the second largest tobacco company in the United States. Defendant BAT is RAI's largest shareholder, holding 42% of its stock. RAI acquired Lorillard (then the third largest tobacco company in the U.S.) in the transaction.
BAT helped fund RAI's purchase of Lorillard (for $27.4 billion) by buying approximately $4.7 billion in RAI stock in order to maintain its 42% ownership of RAI. RAI funded the remainder by selling of several of its popular cigarette brands to Imperial Tobacco Company, a tobacco holding company headquartered in Bristol, England.
Corwin's action asserted that BAT and RAI's board of directors had breached their fiduciary duty of candor to him and other BAT shareholders by making inadequate disclosures regarding the transaction. The claim that the disclosures were inadequate were resolved by a settlement in January 2015. You can read that settlement agreement here.
Did BAT, RAI's 42% Shareholder, Owe A Fiduciary Duty To RAI's Minority Shareholders?
The issue before Judge Gale was whether BAT, which held only 42% of RAI's shares and was therefore not a majority shareholder of RAI's stock, owed any fiduciary duty at all to Corwin and the class of minority shareholders which he was seeking to represent.
North Carolina Law
If you are thinking that in North Carolina only majority shareholders owe a fiduciary duty to minority shareholders, and are skilled enough at math to know that 42% is not a majority, then you are dead on target. Judge Gale wrote that "North Carolina courts have never squarely addressed whether a minority shareholder can exercise control adequate to impose such a fiduciary duty." Op. ¶46.
Corwin argued that a fiduciary duty should be imposed because North Carolina precedent turned on whether the shareholder exercised "dominance and control, which can exist without majority ownership or voting control." Op. ¶46.
To be fair to Mr. Corwin, loose language (you might say dicta) in North Carolina appellate decisions can be read to support the position that a minority shareholder's control (absent majority ownership) of a corporation can result in that shareholder owing a fiduciary duty to its fellow shareholders. Judge Gale cited the following cases for that proposition:
See, e.g., Hill v. Erwin Mills, 239 N.C. 437, 444, 80 S.E.2d at 358, 363 (1954)("It is the general rule that when the fairness of transactions between a corporation and one dominating its policies is challenged, the burden is upon those who would maintain such transactions to show their inherent fairness to all parties concerned."); T-WOL Acquisition Co. v. ECDG S, LLC, 220 N.C. App. 189, 208 n.8, 725 S.E.2d 607, 617 n.8 (2012) ("[C]ontrolling or majority shareholders owe a fiduciary duty to minority shareholders in a closely held corporation." (emphasis added)); Freese v. Smith, 110 N.C. App. 28, 37, 428 S.E.2d 841, 847 (1993) ("In North Carolina, it is well established that a controlling shareholder owes a fiduciary duty to minority shareholders."); . . . . Fulton v. Talbert, 255 N.C. 183, 185, 120 S.E.2d 410, 412 (1961) ("[W]here the corporation is so dominated and controlled by a wrongdoer as to be powerless to act, minority stockholders may bring the action, making the corporation a party.").
Op. ¶53. Judge Gale, upon reviewing those cases, concluded that none of these North Carolina cases held that a "controlling shareholder must be a majority owner" but that in each case imposing a fiduciary duty, "the shareholder subject to that duty either owned or had control over a majority interest." Op. ¶51. He said that North Carolina precedent:
leaves open the specific question of whether a minority shareholder can exercise the degree of control . . . adequate to impose a fiduciary duty on that shareholder.
The argument that North Carolina would impose a fiduciary duty on a non-majority shareholder therefore failed, Judge Gale then turned to Plaintiff's argument that Delaware law placed a fiduciary duty on a "controlling" -- even if minority -- shareholder.
Delaware Law Says That A Minority Shareholder Can Owe A Fiduciary Duty Under Certain Circumstances
The Delaware cases on which Corwin relied in support of his fiduciary duty argument were distinguished by Judge Gale as requiring "actual, rather than theoretical control" before imposing that duty. Op. ¶56.
There is a presumption in Delaware "that a shareholder who owns less than fifty percent of the outstanding stock of a corporation is not a controlling shareholder. Op. ¶56.
Getting past that presumption requires detailed allegations of actual control. Judge Gale said that:
Delaware courts impose a significant pleading burden to allow a fiduciary claim against a minority shareholder and will dismiss such a claim under Delaware's Rule 12(b)(6) in the absence of sufficient allegations.
Corwin's Complaint contained "significant detail," (Op. ¶62), which Corwin said demonstrated BAT's control over RAI (summarized in ¶62 of the Opinion), including a "Governance Agreement," between RAI and BAT which gave BAT veto power over whether certain intellectual property of RAI could be sold to complete the deal and a variety of other factors.
Judge Gale said, after reviewing Corwin's argument, that BAT had influence over the transaction but that "[i]nfluence does not equate to control and the potential imposition of a fiduciary duty turns on evidence of actual control." Op. ¶63.
The conclusion of the Court was that even if North Carolina were to follow the Delaware standard, that the Complaint's allegations did not:
adequately allege that BAT's control over the Transaction was considerable enough to be the voting and managerial equivalent of a majority shareholder's control, or so potent that the independent Other Directors were unable to exercise their judgment freely with[out] fearing BAT's retribution.
Op. ¶65 (citation omitted).
The Court went on to dismiss fiduciary claims against the RAI directors. That dismissal involved a discussion of whether a shareholder has standing to bring a direct claim against a member of a board of directors. That sort of claim is generally brought on a derivative basis. Judge Gale sidestepped the standing issue, ruling that the attempted claim against the RAI directors failed on the merits..Op. ¶74..
Given Corwin's marked lack of success on his claims regarding the RAI Transaction, I'm wondering how much Corwin's counsel will dare to ask for in fees for getting the "disclosure only" settlement which they obtained in January of this year. My views on the value of such settlements are that they often bring little value to the members of the shareholder class obtaining them and that the fees awarded should take that into account.
Judge Gale directed Corwin's counsel to file a motion for approval of their settlement before the end of August. We will soon see if this settlement will spin off a sizeable fee.